Chapter 4 Reporting Financial Performance.

Question 1

What is the Accounting Information System?

Answer 1

The system for collecting and processing transaction data to make financial information available to interested parties

This system is crucial for producing financial statements.

Question 2

Name the four main financial statements under ASPE.

Answer 2

• Statement of Financial Position (Balance Sheet)
• Statement of Comprehensive Income (Income Statement)
• Statement of Cash Flows (Cash Flow Statement)
• Statement of Changes in Shareholders’ Equity (Statement of Retained Earnings)

Question 3

What is the fundamental principle of Double-Entry Accounting?

Answer 3

Debits = Credits

This principle ensures that the accounting equation remains balanced.

Question 4

What is the Accounting Equation?

Answer 4

Assets = Liabilities + Shareholders’ Equity

Question 5

What does the Expanded Accounting Equation include?

Answer 5

Assets = Liabilities + Common Shares + Retained Earnings - Dividends + Revenues - Expenses

Question 6

What is the first step in the Accounting Cycle?

Answer 6

Identifying and Analyzing Transactions and Other Events

Question 7

What do journal entries represent?

Answer 7

A chronological listing of transactions expressed as debits and credits to particular accounts.

Question 8

What is the purpose of the Trial Balance?

Answer 8

Prove the equality of debits and credits.

Question 9

What is the Matching Principle?

Answer 9

Revenues/expenses are recorded in the period in which they are earned/incurred, regardless of when payment occurs.

Question 10

Fill in the blank: Adjusting entries for prepaid expenses result in a debit to an _______ account and a credit to a _______ account.

Answer 10

expense; asset

Question 11

What are accrued revenues?

Answer 11

Revenues that have been earned but have not been received in cash.

Question 12

What is the purpose of the Adjusted Trial Balance?

Answer 12

Provides the basis for the preparation of the financial statements.

Question 13

What does Owners’ Drawings indicate?

Answer 13

Withdrawals by the owner(s)/partners.

Question 14

What is Comprehensive Income?

Answer 14

Comprehensive Income = Net Income +/- Other Comprehensive Income (OCI)

Question 15

True or False: IFRS allows for extraordinary items.

Answer 15

False

Question 16

What is the characteristic of High-Quality Earnings?

Answer 16

• Unbiased and objectively determined
• Reflects economic reality
• Closely correlates with cash flows from operations

Question 17

What is Earnings Management?

Answer 17

The practice of targeting earnings levels and working backward to ensure targets are met, often decreasing the quality of earnings.

Question 18

What is the difference between Single-Step and Multi-Step Income Statements?

Answer 18

Single-Step presents revenues and expenses together; Multi-Step separates operating and non-operating activities.

Question 19

What does EPS stand for?

Answer 19

Earnings Per Share

Question 20

How is EPS calculated?

Answer 20

Net income - Preferred Dividends / Weighted Average of Common Shares Outstanding

Question 21

Fill in the blank: Income measurement follows a modified _______ approach.

Answer 21

all-inclusive

Question 22

What is the significance of the Retained Earnings Statement?

Answer 22

Retained earnings increase by net income and decrease by net loss and declared dividends for the year.

Question 23

What does the Closing Process involve?

Answer 23

Transferring balances in revenue and expense accounts to a clearing account (Income Summary) and then to retained earnings.

Question 24

What causes retained earnings to increase?

Answer 24

Net income

Retained earnings also decrease by net loss and declared dividends.

Question 25

What are the two main components that decrease retained earnings?

Answer 25

Net loss and declared dividends ## Footnote This includes both cash and stock dividends.

Question 26

What are prior period adjustments?

Answer 26

Corrections of errors in prior periods and effects from accounting policy changes ## Footnote These adjustments are treated as prior period adjustments.

Question 27

What does the IFRS Statement of Changes in Equity present?

Answer 27

Total comprehensive income, effects of retrospective application/restatement, reconciliation of equity components ## Footnote Each component of equity is detailed at the beginning and end of the period.

Question 28

What items are included in comprehensive income?

Answer 28

Any item that changes equity except: * Investments by owners * Distributions to owners * Correction of errors and adjustments to retained earnings ## Footnote An example is unrealized gains/losses on revaluation of property, plant, and equipment.

Question 29

How can the statement of comprehensive income be presented?

Answer 29

As a single combined statement or as two separate statements ## Footnote This format choice allows flexibility in presentation.

Question 30

What should be analyzed to assess the health of a company?

Answer 30

Accounting policies, notes to financial statements, measurement uncertainty, financial statements, environmental factors ## Footnote Each of these areas provides insights into the company's quality of earnings.

Question 31

What are non-GAAP measures?

Answer 31

Measures with modified GAAP information ## Footnote Non-GAAP earnings often include adjustments for non-operating items.

Question 32

What should non-GAAP calculations include?

Answer 32

Clear disclosure, reconciliation to net income, and value addition to decision-making ## Footnote There are no standards for consistency across companies.

Question 33

What is the price-earnings ratio?

Answer 33

Market price per share divided by EPS ## Footnote This ratio is used to track and compare earnings multiples between companies and industries.

Question 34

What are the basic presentation requirements under GAAP?

Answer 34

Items required in the Statement of Income/Comprehensive Income ## Footnote These requirements ensure standardization in financial reporting.

Question 35

What should be included in the notes to financial statements?

Answer 35

Accounting policies, sources of estimation uncertainty, information about capital management, general information about the company ## Footnote This information supports the full disclosure principle.

Question 36

What is the purpose of analyzing financial statements?

Answer 36

To assess the quality of earnings and presentation formats ## Footnote Analysts look for aggressive accounting policies and unrecognized liabilities.

Question 37

What does non-GAAP earnings typically exclude?

Answer 37

Nonrecurring or non-operating items ## Footnote An example is EBITDA, which reflects operating performance without financing or accounting effects.

Question 38

What is EBITDA?

Answer 38

Earnings before interest, taxes, depreciation, and amortization ## Footnote This measure allows for analysis of operating performance.

Question 39

True or False: Non-GAAP measures are disallowed in financial reporting.

Answer 39

False ## Footnote Non-GAAP measures are not disallowed but must be clearly disclosed.

Question 40

Adjusting Entries - Prepaid Expenses 1. What are prepaid Expenses? 2. How do you record the original entry? 3. How do you record the Adjusting Entry?

Answer 40

- Expenses paid in cash and recorded as assets - Expire / Used / Consumed over time. Original Entry: DR: Prepaid Expense Account CR: Cash **Adjusting Entry results in a debit to an expense and credit to asset ** Adjusting Entry: DR: Expense CR: Prepaid Expense

Question 41

Adjusting Entries - Prepaid Expenses How do you record the Adjusting Entries?

Answer 41

**Adjusting Entry results in a debit to an expense and credit to asset ** Adjusting Entry: DR: Expense CR: Prepaid Expense

Question 42

Adjusting Entries - Unearned Revenue

Answer 42

Revenues received but not yet earned. Recorded as a liability: Unearned Revenue Og Entry: DR: Cash CR: Unearned Rev (liability) **Adjusting Entries adjust how much of the revenue has been earned during that time. Resulting in a DR to "Unearned Revenue" (liability) and a CR: "Revenue". Adjusting Entry: DR: Unearned Revenue CR: Revenue.

Question 43

Adjusting Entries - Accrued Revenues

Answer 43

Rev has been earned but not received in cash Could accumulate with time (interest inc) or from services performed but not billed or collected (commissions) No OG entry recorded. **Adj entries results in a DR: asset and CR: revenue.

Question 44

Adjusting Entries - Accrued Expenses

Answer 44

Expenses that have been incurred but not yet paid or recorded by the statement date (interest, rent, taxes, salaries) could accumulate with times or from services that have been received but not billed or paid **adj entries results in a DR: Exp. and CR: Liability. DR: Expense CR: Acc Payable

Question 45

Adjusting Entries - Estimating Items: Unrealized Gains / Losses

Answer 45

At the end of each period, an estimate is made of the fair value of investments for - fair value through net income (FV-NI) - Equity investments, debt securities - Fair value through other comprehensive income (FV-OCI) Any unrealized gain/loss must be recorded on Fin. statements. Gains: DR: Investments (FV-NI or FV-OCI) CR: Unrealized Gains (FV-NI or FV-OCI) Losses: DR: Unrealized Loss (FV-NI or FV- OCI) CR: Investments (FV-NI or FV-OCI)

Question 46

What account is "Other comprehensive income" closed to?

Answer 46

Accumulated Other Comprehensive Income Equity section of the Statement of Financial Position (Balance Sheet)

Question 47

What are Reversing Entries? What accounts are they often used for?

Answer 47

Journal entries made at the beginning of a new accounting period to reverse or cancel out certain adjusting entries made at the end of the previous period. They are used to simplify the recording of subsequent transactions and avoid double-counting. Accrued Expenses: - Wages Payable - Wages Expense Accrued Revenues: - Interest Receivable - Interest Revenue

Question 48

What are the uses of the Income Statement?

Answer 48

1. Evaluate past performance and profitability 2. Assist in predicting the future performance 3. Assess potential risk or uncertainty in achieving future cash flows.